Investing is not always the most straightforward thing for most people. J.L. Collins from the Simple Path to Wealth and John Bogle would have to disagree. It is not easy to invest, but index fund investing can make investing uncomplicated.
Investing is a part of having success in your financial journey. One key to helping you create success through simplicity is using an index fund.
John Bogle once said, “Don't look for the needle in the haystack. Just buy the haystack!”
This speaks volumes to his thoughts about index fund investing. Index funds are a more straightforward way for those people like you and me to create wealth.
What is an Index Fund?
An index fund is a type of mutual fund that is passively managed to mirror an index.
One of the most popular indexes around is the S&P 500 index. This has the top 500 companies in the U.S.A., and therefore, it is a popular index for companies to create index funds.
Vanguard, which John Bogle created, created the first index fund. It was VFINX or the Vanguard S&P 500 Index Fund. It has been discontinued and replaced with the cheaper Admiral Shares Verison, VFIAX.
These index funds seek to track and mirror the index results they are following. So VFIAX seeks to have similar effects and market weight as the S&P 500.
The cool thing about index funds is that they are managed passively, allowing lower costs than actively managed mutual funds. These low-cost funds do much better overall than those with higher fees.
Why Choose Index Fund investing?
Index fund investing is not brand new. The first index fund came out in 1976. The invention was a revolution to allow average joes to create wealth passively without having a fund manager take 1-2% of their money every year. On a million-dollar portfolio that could cost up to $10,000- $20,000 a year.
Lower Costs Provided
Index fund investing gives people a lower cost. Most actively managed funds would have a higher expense ratio than an index fund. Plus, if you add that onto any fee that the financial advisor may be charging, you are out a good amount of money.
With a low expense ratio, these index funds offer savings. The money can compound more over time with fewer fees. That means you can grow your money faster and to a more substantial amount.
Fewer fees equal more money in your pocket.
Diversification is Key to Index Fund Investing
Not only do index funds have low costs, but they also have a lot of diversification.
Vanguard is king in creating good index funds for the average person. There top two index funds would be VTSAX and VFIAX. These two have low costs and a lot of diversification. VTSAX has the entire U.S. stock market, which comprises over 4000 companies. VFIAX has the top 500 companies on the U.S. stock market.
If you are looking for diversification, look no further, these index funds provide plenty with large-cap and even mid-cap and small-cap companies. If one company fails, more companies may take its spot or rise up.
The allocation of these funds is not skewed in one particular industry. There is a part in banking, tech, consumer services, and health services.
We always hear of the companies rising, and if the fund tracks an index, it will mirror the results.
Market Returns of the Index Fund
The S&P 500 returned close to 27% in 2021, so an index fund that tracks the S&P500 will have similar results.
They have a fund that matches the index allows you to have similar earnings. This is great because often, fund managers try to beat the market and fail by doing so. 85% of hedge fund managers failed to beat the S&P500 in 2021.
It is a safer bet to invest in an index fund than to find a managed mutual fund that has a manager trying to beat the market with every gut feeling they may have. Please keep it simple and let a fund tracking the market allow you to have great returns.
Less Stress in Index Fund Investing
Investing is not always easy, but it can be simpler than you think. It can be simple with index fund investing, but it takes conviction to know what you are doing. With the index fund, you can worry less about your investments.
By using index fund investing, your portfolio will be able to own all the top stocks out in the market. Right now, Apple, Microsoft, and plenty of other companies are going sky-high in market cap valuations. With a fund that tracks the index, you will have the ability to own them all.
There is no longer the need to pick and choose a winner. Who knows which company will be a winner? So if you buy them all, the diversification will allow your life to be filled with less stress.
Where Do You Find The Best Index Funds?
Many companies go around selling index funds. These companies may sell their version in a 401K or on the market, but take a look at the expense ratios of these index funds. You will be surprised at what some of them charge.
Looking at the several companies that offer significant index funds with great prices, returns, and simplicity, I look no further than Vanguard, Fidelity, and Schwab.
These three companies offer significant funds at low-cost prices.
Vanguard has a couple of significant index funds that many people suggest, like Warren Buffett. When asked about stock picking, Buffett suggested, “I recommend the S&P 500 Index Funds” He had told when he dies to invest 90% of his money into a good S&P 500 index fund, preferring Vanguard funds.
Vanguard Index Funds have been at the forefront of making significant funds for all people to enjoy. You cannot deny their dominance over the sector.
The next best company to go with would be Fidelity. In 2018, Fidelity came out with the Fidelity Zero Fee Funds to help entice more people to join their company of index funds. These can be significant funds like FZROX and FNILX. These index funds were set with a $0 expense ratio and fee.
Lastly, you have Schwab with a good amount of low-cost index funds like SWPPX. They are low-cost, and you cannot go wrong with investing in them.
Here are 4 of the Best Index Funds to Choose From
Finding the best index funds to start your portfolio can be hard. Here are 4 of the best ones to choose from.
1. VTSAX: Vanguard Total Market Index Fund
VTSAX is a leading index fund that has a diversified portfolio. It has a low fee of 0.04%, and it is invested in over 4,000 companies. The negative of this fund is that you need a minimum investment of $3,000 to start investing in it.
If you do not have the cash, you can choose the VTSAX ETF (Exchange Traded Fund) VTI. VTI is slightly cheaper, and you can buy it at the cost of the ETF. The expense ratio is 0.03%.
2. VFIAX: Vanguard S&P 500 Index Fund
The following index fund is the popular Vanguard S&P 500 Index Fund VFIAX. VIFAX tracks the S&P 500 index, and therefore it is comprised of the 500 largest companies in the U.S. These companies are Apple, Amazon, Microsoft, JP Morgan Chase, and ABC (google).
This is a great fund to have exposure to the large-cap companies in the U.S.
3. FZROX: Fidelity Zero Total Market Index Fund
The great thing about this fund is that you get significant exposure to many companies in the U.S. It is about 2500 different companies that make up the Large-cap and mid-cap companies. This is one of those Fidelity zero funds.
With FZROX, you have a zero expense ratio and zero fees. You can open up an account deposit money, investing for your future. It is effortless to get started at a low cost.
4. SWPPX: Schwab S&P 500 Index Fund
The Schwab S&P 500 index fund is like many of these index funds. It invests in the S&P 500 companies. The appealing thing is that this fund is very cheap. There is no minimum investment, but there is a 0.02% expense ratio. That is not that much. With a $10,000 investment 0.02% comes out to about $2 for that $10,000.
For the last ten years, this fund has been on track with the S&P 500, giving a 13% return on investment. Just like the VFIAX, it has a great return, high low costs, and it does well for your portfolio.
Essential Factors For Your Considerations
When you are thinking of your portfolio, you need to consider a couple of things to make the right decision for yourself. My way is not the best way for you, so make sure to consider these factors when investing.
1. Investment Minimums
Not all index funds are alike. The Vanguard index funds have a $3,000 minimum to get started to invest in them. The minimum can be a deterrent for most people.
If an investment minimum will prevent you from investing now, look elsewhere towards ETFs that do not have a minimum or even another brokerage like Fidelity or Schwab.
Vanguard has ETFs like VTI or VOO, some of the best ETFs on the market. They are VTSAX and VFIAX. They can help get you started investing at a lower price.
You can also buy some of these ETFs on other investing platforms like M1 Finance. That can help you create a portfolio with no fees and low-cost index fund ETFs.
2. The Expense Ratios
Not all index funds are made the same. There are index funds that have higher expense ratios. SPY is a popular index fund ETF that tracks the S&P 500. The expense ratio is 0.09%, which is not bad. Instead, you could invest in VOO, which has an expense ratio of 0.03%. SPY vs VOO is an example of different index funds that track the same thing but have a different expense ratio.
401ks also have some index funds in them. Some of these 401ks may have much higher expense ratios on their index funds than you may see with Vanguard or Fidelity, and Schwab, so make sure to take notice of those.
I have seen some 401k index funds with expense ratios of 0.65%-0.90%. It is terrible to see some companies take advantage of people by having higher expense ratios that some do not notice.
3. Diversification is Important
Remember that diversification is essential. The more companies in an index fund, the more likely the crazy ups and downs of the market will not affect it as much.
VTSAX and VFIAX are different in a couple of ways. VTSAX has 4,000 companies, while VFIAX has around 500. The diversification of VTSAX will allow it to have a couple of better years when the market is down than VFIAX. Sometimes it could backfire and have less or rise, but typically VTSAX outperforms in the long run from having more companies to help balance it out.
Always think about how you want your diversification to be.
Index fund investing is a great way to create wealth and create an investment portfolio. By investing in index funds nonstop, you can reach millionaire status. You do not have to research each company being invested in, which means less work.
The majority of people enjoy seeing capital gains as their portfolio goes up. For those dividend investors, there is also dividend index fund investing. Vanguard and Schwab both have different funds that are focused on dividends, which can help.
Index fund investing is a simple approach to investing. J.L. Collins makes this statement about VTSAX as in it is the Simple Path to Wealth. I know many of us would like to be wealthy as quickly as possible, but remember Rome wasn't built in a day, and neither will your wealth.
So keep investing for the long term. Buy and hold index funds and reach wealth the simple way.
I’m Steve. I’m an English Teacher, traveler, and an avid outdoorsman. If you’d like to comment, ask a question, or simply say hi, leave me a message here, on Twitter (@thefrugalexpat1). Many of my posts have been written to help those in their journey to financial independence. I am on my journey, and as I learn more I hope to share more. And as always, thanks for reading The Frugal Expat.